By Jon Tandler, Sherman & Howard L.L.C.
Updated version published in February 15, 2023
Who would ever think that you as an author would need to be concerned with your book publisher going into bankruptcy? Consider the questions you might be pondering.
How will my publisher’s bankruptcy impact me? Will I get my royalties? Will I get my statements? How will my publisher pay to print, much less promote, my book? What about my “rights” — can I get them back? Am I bound by first option, no competitive works or other obligations I have under my contract? What happens to my contract? Can I move my book to a new publisher? Do I need a lawyer?
The answers to these questions will vary with the specific facts and circumstances of a particular bankruptcy, including the decisions and actions of the publisher or (as we sometimes say here) “publisher debtor”. In this Article we discuss the general legal basics of a publisher’s bankruptcy and how they could impact you, an author. This Article is intended to be neutral — we did not write it with any bent or view on behalf of either authors or publishers.
In this Article we discuss six areas we believe are of most immediate relevance to authors:
I. Basic bankruptcy terminology and process;
II. “Ipso facto” (bankruptcy termination) provisions in publishing agreements;
III. “Automatic stays” and their impact on royalty claims;
IV. Legal claims against the publisher debtor;
V. Bankruptcy’s impact on publishing agreements and an author’s obligations thereunder; and
VI. Preference and other claims by a publisher debtor.
1. A provision in a publishing agreement which permits an author to terminate the agreement in the event of the publisher’s bankruptcy, known as an ipso facto clause, is generally unenforceable and is of little benefit to the author. See Section II below.
2. If a publisher commences bankruptcy proceedings, legal claims for royalties and/or contract breach (by reason of the author not timely receiving royalty statements or payments, or for the publisher’s breach of other obligations) will generally be “stayed”, and, in most cases, may only be pursued in the Bankruptcy Court. See Section III below.
3. The terms of a publishing agreement and the publisher’s and author’s rights and obligations under it will generally remain in effect in a bankruptcy case in the same manner and by the same legal principles as those which apply outside of bankruptcy. The ability of an author to enforce those contractual rights and, for example, obtain full payment of earned royalties, however, may vary significantly from case to case, and even from author to author in the same publisher bankruptcy. See Sections IV and V below.
4. An author who receives payments or settlements on a royalty claim outside the publisher’s regular course and schedule, within 90 days prior to a publisher commencing bankruptcy, risks the Bankruptcy Court or bankruptcy Trustee claiming that such payments are a recoverable “preference” requiring the author to return such payments to the Court. See Section VI below.
I. Basic Bankruptcy Terminology and Process.
Below are some important and often-used bankruptcy terms and information about the bankruptcy process.
a) A “Debtor” is a person or entity which files a bankruptcy petition, or against whom a bankruptcy petition is filed, to commence bankruptcy proceedings; in this Article the “debtor” is presumed to be a book publisher and is referred to in this Article as either the “publisher” or “publisher debtor”;
b) A “Chapter 7” is a bankruptcy case brought by either an individual or a company under Chapter 7 of the U.S. Bankruptcy Code; this generally involves appointing a Trustee to assemble and liquidate the debtor’s assets (except for “exempt” assets for individuals) and pay the
proceeds to the debtor’s creditors; this is the traditional bankruptcy liquidation by which an individual receives a “discharge” of debts and a company debtor goes out of business;
c) A “Chapter 11” is a bankruptcy case, usually brought by a company under Chapter 11 of the U.S. Bankruptcy Code; this generally involves a business’ effort to “reorganize” or liquidate itself under a creditor-approved Plan of Reorganization (or Liquidating Plan). During a Chapter 11 case, the debtor’s business usually continues to operate under existing management (in this case, the debtor is known as the “Debtor-in-Possession”), who is subject to removal for fraud, dishonesty, incompetence or gross mismanagement;
d) A bankruptcy “Trustee” is an independent bankruptcy specialist, usually an attorney, who has a fiduciary duty to all creditors and is appointed by the Bankruptcy Court to assemble and liquidate the debtor’s assets in a Chapter 7 or take over operation of a business for reorganization or liquidation in a Chapter 11 (if the Debtor-in Possession is removed from control by the Court); and
e) A “Creditors Committee” may be appointed by the Bankruptcy Court in large Chapter 11 cases to represent the interests of unsecured creditors as a group; this committee assumes a fiduciary responsibility to all unsecured creditors and does not represent the interests of any particular creditor or group of creditors. The members’ expenses are usually compensated through the bankruptcy estate, and they must recuse themselves from any matter that involves them directly. The committee usually hires lawyers and financial advisors who are paid by the bankruptcy estate.
a) Bankruptcy proceedings are specialized and accelerated compared to other judicial processes. A premium is placed on seeking to resolve disputes quickly without requiring every matter to be exhaustively litigated and decided by the court after an expensive hearing.
b) A publisher’s bankruptcy will generally be filed in the United States Bankruptcy Court where the publisher’s principal office is located or in its state of organization — it could be either. Bankruptcy law is Federal (U.S.) law and is generally uniform in all jurisdictions; however, there can be variations between the courts as to how they treat certain issues.
c) Nothing will be done in the Bankruptcy Court that materially impacts an author’s interests without advising the author in writing via regular mail of the action proposed to be taken and providing the author with an opportunity to object. Authors should read all mail from the Bankruptcy Court and process and act on it (to the extent any action is required on the part of the author) on a timely basis. Some mail may simply be notices of procedural items.
d) It is frequently useful to communicate with the debtor or its counsel prior to seeking relief from the Bankruptcy Court, as they are often amenable to working out a resolution to problems and claims.
e) Trade associations representing the interests of several creditors and other parties dealing with a debtor in bankruptcy can be helpful and productive; if the Court or Trustee can
address the claims or issues of a group’s members as a whole, they would likely view this as increasing efficiencies to move the case forward.
II. “Ipso Facto” Clauses in Publishing Agreements.
Some publishing agreements permit the author to terminate it and take his or her rights back solely because of the publisher’s financial condition, insolvency, appointment of a receiver, or commencement of a bankruptcy case. These provisions, often referred to as “ipso facto” clauses, are inoperative and unenforceable in the context of a bankruptcy case. Here is an example:
BANKRUPTCY. If (i) a petition in bankruptcy is filed by the Publisher, or (ii) a petition in bankruptcy is filed against the Publisher and such petition is finally sustained, or (iii) a petition for arrangement is filed by the Publisher or a petition for reorganization is filed by or against the Publisher, and an order is entered directing the liquidation of the Publisher as in bankruptcy, or (iv) the Publisher makes an assignment for the benefit of creditors, or (v) the Publisher liquidates its business for any cause whatever, the Author may terminate this agreement by written notice and thereupon all rights granted by him hereunder shall revert to him.
Ipso facto clauses, by their nature, would penalize a debtor for filing a bankruptcy petition and undermine the effectiveness of the bankruptcy process; they are therefore deemed to be against public policy and cannot be enforced in a bankruptcy case.
Thus, if you are an author with a publishing agreement containing a clause like this, even if your publisher goes into bankruptcy this will be deemed to be unenforceable and you cannot rely on it to terminate your publishing agreement or to get your publishing rights back.
III. The Automatic Stay.
Whether a Chapter 7 or Chapter 11 proceeding, the filing of a bankruptcy petition by a publisher debtor automatically — without any action by a court or any person — stays (stops, prohibits and enjoins) all actions and proceedings against the publisher and enforcement of judgments against the publisher. The petition also prohibits enforcing security interests or liens and any act (including collection or demand letters or phone calls) to collect or recover upon a pre-bankruptcy claim against the publisher debtor. This “automatic stay” has the force of a federal court injunction; eventually, there are/were penalties for any action by a creditor in violation of the stay.
Thus, as an author, if you have not been paid royalties by the publisher, although you will have a claim against the bankruptcy estate for your unpaid funds (see Section IV below) that will be your sole remedy for recovery — if the publisher goes into bankruptcy you will not be able to go to a separate court to obtain a judgment for monies owed to you.
Under very limited circumstances, a claimant, including an author, may ask the Bankruptcy Court to grant “relief” from the automatic stay; this might be where the author has litigation pending against the publisher in another court (for example, a copyright or rights issue that would likely be in Federal District Court) and wishes to pursue that litigation to a determination.
Enforcement and collection of a monetary judgment or other relief, however, would have to be done in the Bankruptcy Court.
As an author, if you have a pending claim against a publisher that you want to continue to pursue and that publisher goes into Chapter 7 or Chapter 11 proceedings, consult with qualified legal counsel to ascertain whether you can still maintain your claim. In our view, when in doubt go to the Bankruptcy Court and ask for relief from the stay — a proceeding for relief from the stay generally takes 30-60 days.
IV. Asserting Royalty and Other Claims Against a Publisher Debtor; Filing Proofs of Claim.
Because of the stay of claims described in Section III above, bankruptcy substitutes a different process for asserting claims against a debtor publisher.
An author’s claims for unpaid royalties must generally be asserted by the author (or his or her representative) by filing a “Proof of Claim” on a standard form in the Bankruptcy Court. Although in some limited circumstances filing a Proof of Claim is not required, in our view it is a good idea to file one; in doing so the author asserting a claim for past due royalties is a general unsecured creditor of the publisher. If a debtor or Trustee contests the amount of an asserted claim, a hearing can be conducted and a final determination entered (usually in the Bankruptcy Court).
As an author who is owed an advance or royalties, if your publisher goes into bankruptcy you will receive a notice in the mail of the deadline for filing Proofs of Claim, together with the standard form and instructions for completing and filing it. Do not miss this deadline(!) as that could result in your entire claim becoming “disallowed” and uncollectible.
As approved by a Chapter 7 Trustee or as provided in a Chapter 11 Plan, distributions of the debtor publisher’s available funds to pay allowed unsecured claims must be made in a nondiscriminatory, pro rata fashion.
As an author, be aware that these payments, especially as to royalties earned and sums (if any) being held by the publisher as a “reserve for returns”, most typically come to a lot less than the actual amounts owed to the claimants because of the debtor’s limited cash. There are situations, however, where an author may be able to obtain payment of the full amount of his or her claim – depending on whether or not the publishing agreement is deemed “executory” and whether or not the publisher wants to “assume” or “reject” it. See Section V below.
V. Bankruptcy’s Impact on Publishing Agreements.
In general, in the event of a publisher’s bankruptcy all of the contractual rights and ongoing obligations of both publisher and author will remain in effect according to the same legal principles as existed prior to the publisher’s bankruptcy. This includes royalty obligations as discussed in Section IV above, as well as reversion rights and other rights and obligations as set forth in the publishing agreement. The general principle here is that the debtor brings into bankruptcy the same legal rights it had before bankruptcy.
Thus if your publisher goes into bankruptcy you should plan and count on contractual provisions pertaining to out of print and reversion, negative covenants such as no competitive works or first option clauses, subsidiary rights licenses that the publisher has entered into in accordance with your grant of rights to it, and other contractual provisions and arrangements, all remaining in full force and effect and binding on the parties.
However, although all contract rights will generally remain in effect, the author’s ability to enforce those rights against the debtor will be greatly affected by bankruptcy, including limitations imposed by the automatic stay discussed in Section III above. In the event you as an author have questions about the status of your contractual rights and ability to enforce them, you should consult a bankruptcy attorney and, if necessary, request a determination by the Bankruptcy Court as to the enforceability of these obligations.
For example, if the publisher-debtor continued to use your property, such as your copyrighted material, without performing any of its obligations to you, the automatic stay would bar you from taking unilateral action against the debtor; however, bankruptcy law allows you to seek “adequate protection” for your rights from the bankruptcy court, thereby potentially allowing you the same relief through a different court-approved path.
In some situations, a publishing agreement may be deemed by a Bankruptcy Court to be “executory” – this means that material affirmative obligations remain to be performed by both publisher and author (as opposed to just the publisher). Different Bankruptcy Courts, as well as different publisher debtors and creditors committees, may reach different conclusions as to whether a particular publishing agreement will be deemed to be “executory” or “non-executory” in a bankruptcy case. The Bankruptcy Court has the authority to make the final determination whether a publishing contract is executory.
If a publishing agreement is deemed to be “executory” by the Bankruptcy Court, the publisher will generally not be permitted to retain ongoing rights under the agreement, or insist on further performance by the author, or assign or sell the agreement to another publisher, unless it “assumes” the agreement. To “assume” an executory agreement, the publisher is required to fully cure any existing defaults (such as past-due advance or royalty obligations) and continue to meet all of its obligations to the author in a full and timely manner going forward.
For example, where a publisher has not paid an advance against royalties when due, and the author has not delivered his or her manuscript due to the publisher, given the important obligations yet to be performed by both parties this contract would properly be viewed and deemed to be executory; the only way the publisher could insist on delivery of the manuscript and sue the author for breach if the manuscript is not delivered, would be for the publisher to assume the agreement, pay the due advance and otherwise perform all of its obligations.
If an author is evaluating whether to provide a manuscript when the author believes that the publisher may commence bankruptcy proceedings and the publisher has not paid the author the advance when due, the author should carefully consider the matter before stopping the author’s performance. If the author has a manuscript delivery obligation pre-bankruptcy, absent some circumstance which we cannot predict today, we would counsel the author to deliver the manuscript on a timely basis (hence not commit breach, or “anticipatory breach”) and then work through the publisher’s performance (or not) via the bankruptcy proceedings and, if warranted, a court — blessed reversion of rights.
If the publisher does not “assume” an agreement that is deemed “executory”, it will be deemed to have “rejected” the agreement – which means that it will be treated for legal purposes as if the publisher breached the agreement when the publisher files its bankruptcy petition. A “rejected” executory agreement would in most cases leave the author with a reduced recovery of past due royalties (perhaps significantly), and would leave the publisher with minimal, if any, rights to the book going forward.
For clarity, in the case of a publisher’s rejection of an executory contract (i) the publisher cannot enforce the author’s performance of the author’s obligations, (ii) the publisher has no ability to sell or assign the agreement, and (iii) for practical purposes this would suggest that the publisher is not going forward with the author’s book.
Thus, essentially the publisher will be either dropping the contract and its rights thereunder either under express reversionary or termination language (which the author could enforce), or the author could go to the Bankruptcy Court and request a release or termination of the author’s rights.
Should the publisher act in such a manner that would permit or foster a reversion that is not automatic, the author would need to act proactively in the bankruptcy proceedings to confirm the reversion, so that the title had a clean bill of health (be free of any adverse claims), before being sold to a new publisher.
If a publishing agreement is deemed to be “non-executory”, the publisher will not be permitted to “assume” it. In that case, the author will likely be treated as a general unsecured creditor with prospects for only a reduced recovery of royalties — past due, present and future (as discussed in Section IV), with the publishing rights remaining with the publisher subject to express contractual reversion rights. As to future royalties, the author’s prospects for receiving full or partial payments may depend upon a variety of factors, including whether the publisher debtor is able to sell/assign the publishing agreement to a new publisher (in which case the author should receive full payments going forward), the effect of the author’s reversion rights, or how the publisher debtor may treat future royalties under a plan of reorganization.
VI. Claims (including Preference Claims) against Others by a Publisher in Bankruptcy.
A debtor in bankruptcy may pursue claims and enforcement actions against other persons — sometimes in the Bankruptcy Court, sometimes in other courts. If the author has an obligation to the publisher, the publisher is entitled to sue that author to require his or her performance (for example, completing a manuscript or compliance with a competitive works or first option clause, subject to applicable defenses).
One very unusual type of claim that only exists in the context of bankruptcy, is a claim to recover a “preferential transfer.” A “preferential transfer” — or “preference” — is generally a transfer (a payment) made by the debtor to a creditor, on account of a debt (monies owed) by the debtor to the creditor (this could be the payment of royalties); this payment is made within 90 days immediately prior to the filing of the bankruptcy petition.
This preferential payment effectively enables the creditor recipient to receive more than it would have received in a pro rata distribution under a bankruptcy liquidation. Thus, the recipient of that payment is required to repay money legitimately owing and paid to it, and then file a Proof of Claim to get some (usually reduced) part of it back.
In the context of publishing agreements, exposure to “preference” recovery claims is most likely if a royalty payment is made within 90 days prior to the publisher’s filing of a bankruptcy petition. Should this occur, the author is likely to receive a demand from the publisher debtor (or the bankruptcy Trustee) for repayment.
There are several defenses that may be asserted against a claim for recovery of a “preference”. The author’s best (though perhaps not only) defense is likely to be the “ordinary course” exception — i.e., that the payment was made “in the ordinary course of business and financial affairs” of the publisher and author and “according to ordinary business terms” in the industry.
The success of this defense may depend on the degree to which the timing of the payment comported with, or departed from, the normal historical course of dealings between the parties; if the royalty payment(s) were made as per the publisher’s usual schedule, those facts would support an “ordinary course” defense – and the “preference” would not have to be disgorged even though the payment had been made to the author during the 90 days immediately prior to the filing of the bankruptcy petition.
(1) ©2023 Sherman & Howard L.L.C. This Article was prepared on behalf
of Romance Writers of America® (RWA), a nonprofit trade association
representing the professional interests of romance writers. This Article
serves as an attachment to the Article of even date also prepared on
behalf of RWA for its Author community, entitled Steps to Take if Your
Publisher is Ceasing Business Operations or Headed into Bankruptcy. This
Article was originally written in 2010 for RWA by Jon Tandler and Ed
Ramey of Isaacson Rosenbaum P.C.. This Article was updated in 2022 by
Jon Tandler and Eric Johnson of Sherman & Howard L.L.C., Denver,
Colorado. This Article is not to be relied on as legal advice, is for
general information, and contains the views of the writers only. Readers
should consult with their own legal counsel and advisors to obtain an
informed analysis of their individual circumstances.